STATISTICAL SAMPLING

FOR AUDITORS

Jeanne H. Yamamura
APIPA 2009 CPA, MIM, PHD
OBJECTIVES
• Review of sampling concepts
• Types of sampling
•

• Attribute sampling
•

• Steps
• Nonstatistical attribute sampling
• Compliance auditing
• Monetary unit sampling
•

• Steps
• Nonstatistical monetary unit sampling
• Classical sampling
•

APIPA 2009 • Ratio estimation

• Difference estimation
AUDIT SAMPLING

• Application of an audit procedure to less

than 100% of the items in a population
•

• Account balance
• Class of transactions
• Examination “on a test basis”
• Key: Sample is intended to be representative
of the population.

APIPA 2009
SAMPLING RISK

• Possibility that the sample is NOT

representative of the population
• As a result, auditor will reach WRONG
conclusion
• Decision errors
•

• Type I – Risk of incorrect rejection

• Type II – Risk of incorrect acceptance

APIPA 2009
TYPE I – RISK OF
INCORRECT REJECTION
• Internal control: Risk that sample supports
conclusion that control is NOT operating
effectively when it really is
•

• AKA – Risk of underreliance, risk of assessing

control risk too high
• Substantive testing: Risk that sample
supports conclusion that balance is NOT
properly stated when it really is
APIPA 2009
TYPE II – RISK OF
INCORRECT ACCEPTANCE
• Internal control: Risk that sample supports
conclusion that control is operating
effectively when it really isn’t
•

• AKA – Risk of overreliance, risk of assessing

control risk too low
• Substantive testing: Risk that sample
supports conclusion that balance is properly
stated when it really isn’t
APIPA 2009
WHICH RISK POSES THE
GREATER DANGER TO AN
AUDITOR?
•Risk of incorrect rejection
•

• Efficiency
• Risk of incorrect acceptance
•

• Effectiveness
• Auditor focus on Type II
•

• Also provides coverage for Type I

APIPA 2009
NONSAMPLING RISK

• Risk of auditor error

•

• Sample wrong population

• Fail to detect a misstatement when applying audit
procedure
• Misinterpret audit result
• Controlled through
•

• Adequate training
• Proper planning
• Effective supervision
APIPA 2009
SAMPLE SIZE FACTORS

• Desired level of assurance (confidence

level)
• Acceptable defect rate (tolerable error)
• Historical defect rate (expected error)

APIPA 2009
CONFIDENCE LEVEL

• Complement of sampling risk

•

• 5% sampling risk, 95% confidence level

• How much reliance will be placed on test results
• The greater the reliance and the more severe the
consequences of Type II error, the higher the
confidence level needed
• Sample size increases with confidence level
(decreases with sampling risk)

APIPA 2009
TOLERABLE ERROR AND
EXPECTED ERROR
• “Precision” – the gap between tolerable error
and expected error
• AKA Allowance for sampling risk
• Sample size increases as precision decreases

APIPA 2009
WHEN DO YOU SAMPLE?

• Inspection of tangible assets, e.g., inventory

observation
• Inspection of records or documents, e.g.,
internal control testing
• Reperformance, e.g., internal control testing
• Confirmation, e.g., verification of AR
balances

APIPA 2009
WHEN IS SAMPLING
INAPPROPRIATE?
• Selection of all items with a particular
characteristic, e.g., all disbursements > $100,000
• Testing only one or a few items, e.g., automated IT
controls, walk throughs
• Analytical procedures
• Scanning
• Inquiry
• Observation

APIPA 2009
WALKTHROUGHS

• Designed to provide evidence regarding the design

and implementation of controls
• Can provide some assurance of operating
effectiveness BUT
•

•
Depends on nature of control (automated or manual)
• Depends on nature of auditor’s procedures to test control
(also includes inquiry and observation combined with
strong control environment and adequate monitoring)
• Walkthough = sample of 1

APIPA 2009
STATISTICAL VS
NONSTATISTICAL SAMPLING
• Statistical sampling
•

• Statistical computation of sample size

• Statistical evaluation of results
• Nonstatistical sampling
• Sample sizes should be approximately the same
(AU 350.22)
• Sample sizes must be sufficient to support reliance
on controls and assertions being tested

APIPA 2009
WHEN IS SAMPLING
NONSTATISTICAL?
• If sample size determined judgmentally
• If sample selected haphazardly
• If sample results evaluated judgmentally

APIPA 2009
TYPES OF SAMPLING

• Attribute sampling
• Monetary unit sampling
• Classical variables sampling

APIPA 2009
ATTRIBUTE SAMPLING

• Used to estimate proportion of a population

that possesses a specific characteristic
• Most commonly used for T of C
• Can also be used for dual purpose testing (T
of C and Substantive T of T)

APIPA 2009
MONETARY-UNIT
SAMPLING
• AKA probability proportional to size (PPS)
sampling, cumulative monetary unit
sampling
• Used to estimate dollar amount of
misstatement

APIPA 2009
CLASSICAL VARIABLES
SAMPLING
• Uses normal distribution theory to identify
amount of misstatement
• Useful when large number of differences
expected
•

• Smaller sample size than MUS

• Effective for both overstatements and
understatements
• Can easily incorporate zero balances
APIPA 2009
IN-CLASS EXERCISE NO. 1

APIPA 2009
IN-CLASS EXERCISE NO. 1

Test Involves Attribute / Variable / MUS / NA

Sampling?
1 Yes Attribute (ST of T)
2 No NA
3 Yes Attribute (T of C)
4 No NA
5 No NA (Could be MUS if large population)

6 No NA
APIPA 2009
IN-CLASS EXERCISE NO. 1

Test Involves Attribute / Variable / MUS / NA

Sampling?
7 Yes Attribute (T of C)
8 Yes MUS
9 No NA
10 Yes Attribute (T of C/ST of T)
11 No NA

APIPA 2009
STEPS IN STATISTICAL
ATTRIBUTE SAMPLING
APPLICATION
•

•
Planning
1. Determine the test objectives
2. Define the population characteristics
3. Determine the sample size
• Performance
•

1. Select sample items

2. Perform the auditing procedures
• Evaluation
•

1. Calculate the results

2. Draw conclusions
APIPA 2009
STEP 1: DETERMINE THE
TEST OBJECTIVES
• Objective for T of C: To determine the
operating effectiveness of the internal
control
•

• Support control risk assessment below maximum

• Identify controls to be tested and understand
why they are to be tested

APIPA 2009
TESTS OF CONTROLS

• Concerned primarily with

•

• Were the necessary controls performed?

• How were they performed?
• By whom were they performed?
• Appropriate when documentary evidence of
performance exists

APIPA 2009
STEP 2: DEFINE THE
POPULATION
CHARACTERISTICS
Define the sampling population
•

• Assertion
• Completeness
• Define the sampling unit
•

• Determined by available records

• Define the control deviation conditions

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Determine factors
•

• Desired confidence level (direct)

• Tolerable deviation rate (inverse)
• Expected population deviation rate (direct)
• Desired confidence level
•

• If planning to rely on controls, would be 90 to

95%
• Significance of account and importance of
assertion affected by control being tested
APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Tolerable deviation rate
•

• Maximum deviation rate that auditor willing to

accept and still consider control effective
•

• Control would be relied upon

• Why any errors acceptable?
Assessed importance of control Tolerable
•

• Control deviation = Misstatement deviation rate

Highly important 3-5%
Moderately important 6-10%

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Expected population deviation rate
•

• Rate expected to exist in population

• Based on prior years’ results or pilot sample
• If expected population deviation rate > tolerable
rate, DO NOT TEST
• SAMPLE SIZE TABLES

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Testing multiple attributes on the same
sample
•

• Select largest sample size and audit all of them

for all attributes
• Result is some overauditing BUT may take less
time than trying to remember which sample
items need to be tested for which attribute

APIPA 2009
FINITE POPULATION
CORRECTION FACTOR
• When population size < 500
• Apply finite population correction factor
•

• √1-(n/N)
•

• Where n = sample size from table and N = number of

units in population

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
• Sample must be selected to be representative
of the population
• Each item must have an equal opportunity of
being selected

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
• Random number selection
•

• Unrestricted random sampling without

replacement (once selected cannot be selected
again)

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
• Random number table
•

• Need to document
•

• Correspondence: relationship between population

and random number table
• Route: selection path, e.g., up or down columns, and
right to left (must be consistent)
• Starting point: starting row, column, digit
• Stopping point: to enable adding more sample items
if needed
APIPA 2009
RANDOM NUMBER TABLE
ILLUSTRATION
• Select a sample of 4 items from prenumbered
canceled checks numbered from 1 to 500. Start at
row 5, column 1, digit starting position 1. Select
three-digit numbers. Items selected are:
•

• 145 (sample item #1)

•
516 (discard because checks numbers do not exceed 500)
•
032 (sample item #2)
• 246 (sample item #3)
• 840 (discard)181 (sample item #4)

APIPA 2009
RANDOM NUMBER TABLE
ILLUSTRATION
• To minimize discards, table numbers > 500 can be
reduced by 500 to produce a sample item within the
population boundary of 1 to 500. The four sample
items selected are:
•

• 145 (sample item #1)

• 016 (sample item #2 = 516 – 500 = 016)
• 032 (sample item #2)
• 246 (sample item #3)
• 340 (sample item #4 = 840 – 500 = 340)

APIPA 2009
RANDOM NUMBER TABLE
ILLUSTRATION
• Select 4 sales invoices numbered from 5000 to
12000. Start at row 21, column 2, digit starting
point 1. Rather than use a 5-digit number, which
produces a large number of discards, add a constant
to get a population with 4 digits. If a constant of
3000 is used, the usable numbers selected from
2000 to 9000 are:
•

• 6,043 (sample item #1 = 3043 + 3000)

•
10,120 (sample item #2 = 7120 + 3000)
•
10,212 (sample item #3 = 7212 + 3000)
• 5,259 (sample item #4 = 2259 + 3000)

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS - EXCEL
• Excel
•

• Select Tools
• Select Data Analysis
• Select Sampling

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS - EXCEL

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
•
Input Range
•
Enter the references for the range of data that contains the population of values
you want to sample. Microsoft Excel draws samples from the first column, then
the second column, and so on.
•
Labels
•
Select if the first row or column of your input range contains labels. Clear if
your input range has no labels; Excel generates appropriate data labels for the
output table.
•
Sampling Method
•
Click Periodic or Random to indicate the sampling interval you want.
•
Period
•
Enter the periodic interval at which you want sampling to take place. The
period-th value in the input range and every period-th value thereafter is copied
to the output column. Sampling stops when the end of the input range is
reached.

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
•
Number of Samples
•
Enter the number of random values you want in the output
column. Each value is drawn from a random position in the
input range, and any number can be selected more than
once.
• Output Range
•
Enter the reference for the upper-left cell of the output table.
Data is written in a single column below the cell. If you
select Periodic, the number of values in the output table is
equal to the number of values in the input range, divided by
the sampling rate. If you select Random, the number of
values in the output table is equal to the number of samples.

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
•
Systematic selection
•

•
Determine sampling interval = Population / Sample Size
•
Ensure population is in random order
• Select random starting number (within first interval)
•

•
Better to use multiple random starting points to reduce risk of
missing systematic deviations
• Select every nth item
•
Continue sample selection until population is exhausted
•

• (Last sample selected + sampling interval) > Last item in

population
•
In other words, don’t stop when desired sample size reached
APIPA 2009
STEP 5: PERFORM THE
AUDITING PROCEDURES
• Conduct planned audit procedures
• What if?
•

• Voided documents - if properly voided, not a

deviation; replace with new sample item
• Unused or inapplicable documents – replace
with new sample item
• Inability to examine sample item – deviation
• Stopping test before completion – large number
of deviations detected
APIPA 2009
STEP 5: PERFORM THE
AUDITING PROCEDURES
• Deviations observed
•

• Investigate nature, cause, and consequence of

every exception
•

• Unintentional error? Or fraud?

• Monetary misstatement resulted?
• Cause – misunderstanding of instructions?
Carelessness?
• Effect on other areas?
APIPA 2009
STEP 6: CALCULATE
RESULTS
• Summarize deviations for each control
• Calculate sample deviation rate and
computed upper deviation rate
•

• Sample deviation rate + Allowance for sampling

risk = Computed upper deviation rate
• Statistical sampling results evaluation tables

APIPA 2009
STEP 7: DRAW
CONCLUSIONS
• If Computed Upper Deviation Rate >
Tolerable Rate, control is ineffective and
cannot be relied upon.
• If Computed Upper Deviation Rate <
Tolerable Rate, control is effective

APIPA 2009
EVALUATION OF
EXPOSURE
• In a sample of 25 manual control operations
from a population of 3,000 control
operations, 1 deviation was identified. The
sample was designed with an expectation
that 0 deviations would be found.
• Looking up the results (in 90% confidence
level table): Computed upper error limit =
14.7%

APIPA 2009
EVALUATION OF
EXPOSURE
• The sample did not meet its design criteria, so there is a
higher than desired risk that the control will fail to prevent
or detect a misstatement.
• To assess the magnitude of the exposure:
•

• Identify the gross exposure of the account or process.

This is based on the volume of dollars processed through
the control.
• The upper limit on the control deviations was 14.7%.
• The adjusted exposure is $735,000 (14.7% *
$5,000,000).
• The $735,000 exposure may assist the auditor in
evaluating the severity of the control deficiency.
APIPA 2009
IN-CLASS EXERCISES NO.
2 & NO. 3

APIPA 2009
IN-CLASS EXERCISE NO. 2
Problem 1: Prenumbered
sales invoices where the
lowest invoice number is 1
and the highest is 6211.
Sampling unit Sales invoice
Population numbering system 1 to 6211
Random number table Use 4 digits with random start
correspondence at 0029-05 going down and
then right
First 5 items in sample 3553 0081 4429 0484 4881

APIPA 2009
IN-CLASS EXERCISE NO. 2
Problem 2: Prenumbered
bills of lading where the
lowest document number is
21926 and the highest is
28511.
Sampling unit Bill of lading
Population numbering system 21926 to 28511
Random number table Use last 4 digits with random
correspondence start at 0005-07
First 5 items in sample 7744 7632 8120 3736 4091

APIPA 2009
IN-CLASS EXERCISE NO. 2
Problem 3: Accounts Receivable
on 10 pages with 60 lines per page
except the last page, which has
only 36 full lines. Each line has a
customer name and an amount
receivable.
Sampling unit Each line
Population numbering system 9 * 60 = 540 + 36 = 576 lines
Add 2000 (2001 to 2576)
Random number table Use last 4 digits with random
correspondence start at 00040-01 going down
and then right
First 5 items in sample 2240 2055 2094 2087 2608
APIPA 2009
IN-CLASS EXERCISE NO. 2
Problem 4: Prenumbered invoices in a
sales journal where each month starts
over with number 1. (Invoices for each
month are designated by the month
and document number.) There is a
maximum of 20 pages per month with
a total of 185 pages for the year. All
pages have 75 invoices except for the
last page for each month.
Sampling unit Page of invoices
Population numbering system Starting with January, first page is 1
(up to 185)
Random number table Random start at 0008-03 going down
correspondence then right, subtract random number
from next 1000
First 5 items in sample 4000 – 3982 = 18; 7000 – 6847 =
APIPA 2009 153; 5000 - 4956 = 44; 6000 – 5985
= 15; 5000 – 4941 = 59
IN-CLASS EXERCISE NO. 3

For
which
of
these
auditi
ng
proce
dures
can
attrib
ute
sampli
ng be
APIPA 2009
conve
IN-CLASS EXERCISE NO. 3

For
which
of
these
auditi
ng
proce
dures
can
attrib
ute
sampli
ng be
APIPA 2009
conve
IN-CLASS EXERCISE NO. 3

2. Considering the audit procedures to be performed,

what is the most appropriate sampling unit for
conducting most of the audit sampling tests?

Sales invoice

APIPA 2009
IN-CLASS EXERCISE NO. 3

For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
4. Existence of the sales No record of the sales
invoice number in the sales invoice number in the sales
journal journal
5a. Amount and other data The amount recorded in the
in MF agree with the sales MF differs from the amount
journal entry recorded in the sales journal.
APIPA 2009
IN-CLASS EXERCISE NO. 3

For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
5b. Amount and other data Customer name and account
on the duplicate sales number on the invoice differ
invoice agree with the sales from the information
journal entry recorded in the sales journal

APIPA 2009
IN-CLASS EXERCISE NO. 3

For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
5b. Evidence that pricing, Lack of initials indicating
extensions, and footings verification of pricing,
are checked (initials and extensions, and footings.
correct amounts).

APIPA 2009
IN-CLASS EXERCISE NO. 3

For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
5c. Quantity and other data Quantity of goods shipped
on the bill of lading agree differs from quantity on sales
with the duplicate sales invoice
invoice and sales journal

APIPA 2009
IN-CLASS EXERCISE NO. 3
For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
5d. Quantity and other Quantity on the sales order
data on the sales order differs from quantity on the
agree with the duplicate duplicate sales invoice
sales invoice
5e. Quantity and other data Product number and
on the customer order description on the customer
agree with the duplicate order differ from information
sales invoice
APIPA 2009
on the duplicate sales invoice
IN-CLASS EXERCISE NO. 3
For each T of C or ST of
T, identify the attribute
being tested and the
exception condition.
Attribute Exception Condition
5e. Credit is approved Lack of initials indicating
credit approval
6. For recorded sales in the BL is not attached to the
sales journal, the file of duplicate sales invoice and
supporting documents the customer order.
includes a duplicate sales
invoice, BL, sales order,
and customer order.
APIPA 2009
IN-CLASS EXERCISE NO. 3

See Solution

APIPA 2009
STEPS IN NONSTATISTICAL
ATTRIBUTE SAMPLING
APPLICATION
•
Planning
•

1. Determine the test objectives

2. Define the population characteristics
3. Determine the sample size
• Performance
•

1. Select sample items

2. Perform the auditing procedures
• Evaluation
•

1. Calculate the results

APIPA2.2009Draw conclusions
STEP 3: DETERMINE THE
SAMPLE SIZE
• Consider desired confidence level, tolerable
deviation rate, and expected population
deviation rate
• Judgmentally determine sample size
• NOTE: Check against statistical sample size
tables to verify adequacy

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Guidelines for nonstatistical sample sizes for tests of
controls
• If any errors found, increase sample size or increase
control risk

Desired level of controls reliance Sample size

Low 15-20
Moderate 25-35
High 40-60

APIPA 2009
STEP 4: SELECT SAMPLE
ITEMS
• Random sample
• Systematic sample (with random start)
• Haphazard selection
•

• Still desire representative sample

• Avoid unusual, large, first or last

APIPA 2009
STEP 6: CALCULATE THE
RESULTS
• No computed upper deviation rate
• If sample deviation rate > expected
population deviation rate, control not
effective

APIPA 2009
COMPLIANCE AUDITING

• Performance of auditing procedures to determine

whether an entity is complying with specific
requirements of laws, regulations, or agreements
• Governmental entities and other recipients of
governmental financial assistance
•

• Compliance with laws and regulations that materially

affect each major federal assistance program

APIPA 2009
COMPLIANCE AUDITING OF
FEDERAL ASSISTANCE
PROGRAMS
Definition of population for testing of an
•

internal control procedure that applies to

more than one program
•

• Define items from each major program as a

separate population, OR
• Define all items to which control is applicable as
a single population
• Second choice usually more efficient
APIPA 2009
COMPLIANCE AUDITING -
EXAMPLE
• Federal financial assistance for Island City
•

• Three major federal financial assistance

programs
• Four nonmajor programs
• Control: Transaction review to ensure that
only legally allowable costs are charged to
each program

APIPA 2009
COMPLIANCE AUDITING -
EXAMPLE
• More efficient to select one sample from
population of all transactions (major and
nonmajor programs)
• Confidence level = 95%
• Tolerable deviation rate = 9%
• Expected population deviation rate = 1%
• Sample size: 51
• 1 allowable deviation

APIPA 2009
SMALL POPULATIONS AND
INFREQUENTLY OPERATING
CONTROLS
Small Population
Sample Size Table
Control Frequency and Sample Size
Population Size
Quarterly (4) 2
Monthly (12) 2-4
Semimonthly (24) 3-8
Weekly (52) 5-9

APIPA 2009
IN-CLASS EXERCISE NO. 4

APIPA 2009
IN-CLASS EXERCISE NO. 4

Selected Payroll T of C
1. Examine the time card for Moderately critical – affects
approval of a supervisor E/O of S& W

2. Account for a sequence Very critical – affects E/O of

of payroll checks in the S&W
payroll journal

3. Recompute hours on the Moderately critical – affects

time card V of S&W
APIPA 2009
IN-CLASS EXERCISE NO. 4

4. Compare the employee Very critical – affects E/O -

name in the payroll journal to affects E/O of S& W; also an
personnel records area subject to fraud

5. Review OT charges for Moderately critical – affects

approval of a supervisor E/O and V of S&W

APIPA 2009
IN-CLASS EXERCISE NO. 4

Selected Cash
Disbursement T of C
6. Examine voucher for Very critical – affects E/O of
supporting invoices, receiving purchase transactions
reports, etc.
7. Examine supporting Moderately critical – affects
documents for evidence of validity of purchase
cancellation (“paid”) transactions and relates to
double payment

APIPA 2009
IN-CLASS EXERCISE NO. 4

Selected Cash
Disbursement T of C
8. Ascertain whether cash
discounts were taken
Least critical – affects V of
purchase transactions; amounts
usually minor

9. Review voucher for clerical Moderately critical – affects V

accuracy of purchase transactions

APIPA 2009
IN-CLASS EXERCISE NO. 4

Selected Cash
Disbursement T of C
10. Agree purchase order price Moderately critical – affects V
to invoice of purchase transactions

APIPA 2009
MONETARY UNIT
SAMPLING
• Uses attribute sampling theory to express
conclusions in dollar amounts
•

• Estimates the percentage of monetary units in a

population that might be misstated
• Multiples the percentage by an estimate of how much the
dollars are misstated
• Developed by auditors
• Assumes little or no misstatements
• Designed primarily to test for overstatements
APIPA 2009
ADVANTAGES

• When no misstatements expected, results in

smaller (more efficient) sample size than
classical variables sampling
• No need to compute/identify standard
deviation
• Automatically stratifies sample

APIPA 2009
DISADVANTAGES

• Zero or negative balances must be tested

separately
• Assumes audited amount of sample items is
not in error by more than 100%
• When more than 1 or 2 misstatements found,
allowance for sampling risk may be
overstated
•

• Auditor more likely to reject balance and

overaudit
APIPA 2009
STEPS IN MONETARY UNIT
SAMPLING APPLICATION
• Planning
•

1. Determine the test objectives

2. Define the population characteristics
3. Determine the sample size
• Performance
•

1. Select sample items

2. Perform the auditing procedures
• Evaluation
•

1. Calculate the results

2. Draw conclusions
APIPA 2009
STEP 1: DETERMINE THE
TEST OBJECTIVES
• Substantive testing: To test the
reasonableness of an amount, i.e., that an
amount is fairly stated
• To test the assertion that no material
misstatements exist in an account balance,
class of transactions, or disclosure
component of the financial statements

APIPA 2009
STEP 2: DEFINE THE
POPULATION
CHARACTERISTICS
Define the sampling population
•

• Monetary value of an account balance

• Verify completeness of population
• Define the sampling unit - Each individual dollar
• Define the logical unit - The account or transaction
that contains the sampling units
• Define a misstatement – The difference between the
book value and the audited value

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Determine factors (effect on sample size)
•

• Desired confidence level (direct)

•

• To increase confidence, more work is required!

(larger sample size)
• Tolerable misstatement (inverse)
• Expected misstatement (direct)
• Population size (direct)

APIPA 2009
STEP 3: DETERMINE THE
SAMPLE SIZE
• Computing sample sizes using the attribute
sampling tables
•

• Select desired confidence level

• Compute tolerable misstatement as percentage of
book value
• Compute expected misstatement as percentage
of book value
• Look up sample size in attribute sampling table

APIPA 2009
STEP 4: SELECT THE
SAMPLE ITEMS
• Systematic selection approach called
probability proportional to size (PPS)
• Calculate sampling interval
•

• Book value / sample size

• From random start (within first interval),
select every nth dollar
•

• Logical unit included only once even if includes

more than one sample unit
APIPA 2009
STEP 5: PERFORM THE
AUDITING PROCEDURES
• Conduct planned audit procedures on logical
units
• What if?
•

• Missing document – consider to be a

misstatement

APIPA 2009
STEP 6: CALCULATE
RESULTS
• Projected misstatement: Projection of the
errors to the population
• Upper limit on misstatement: Adds an
allowance for sampling risk to the projected
misstatement

APIPA 2009
STEP 6: CALCULATE
RESULTS
• Sort misstatements into two groups
•

• Group 1: Logical unit equal to or greater than

the sampling interval
• Group 2: Logical unit less than the sampling
interval
• For Group 2, compute the tainting factor for
each misstatement
•

• Tainting factor = Book value – Audit value

•
APIPA 2009
Book value
STEP 6: CALCULATE
RESULTS
• Place the Group 2 items in rank order by tainting
factor (from largest to smallest)
• Compute the projected misstatement
• Calculate the upper limit increments (using the
Monetary Unit Sampling – Confidence Factors
for Sample Evaluation table)
• Calculate upper misstatement for each Group 2
item
• Add differences for Group 1
•
Total = Upper misstatement limit

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
• Book value = $3,100,000
• Tolerable misstatement = $150,000
• Expected misstatement = $25,000
• Desired confidence level = 95%
• Tolerable misstatement rate = 4.8%,round to
5%
• Expected misstatement rate = .8%, round to
1%

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
• Sample size = 93
• Sampling interval = $33,333
• Expected misstatement = $25,000

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Book Value Audited Value Difference

Item 1 12,000 3,120 8,880

Item 2 35,000 32,000 3,000
Item 3 1,400 0 1,400
Item 4 45,200 41,000 4,200
Item 5 740 555 185

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Book Value Audited Value Difference

Group 1: BV
> SI (33,333)
Item 2 35,000 32,000 3,000
Item 4 45,200 41,000 4,200
7,200

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Difference Book Value Tainting Factor

Group 2: BV
< SI (33,333)
Item 1 8,880 12,000 .74
Item 3 1,400 1,400 1.0
Item 5 185 740 .25

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Tainting Factor Sampling Projected
Interval Misstatement
(Tainting Factor
* SI)

Item 3 1.0 33,333 33,333

Item 1 .74 33,333 24,666
Item 5 .25 33,333 8,333

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Projected 95% Upper Upper
Misstatement Limit Increment Misstatement

Item 3 33,333 3.0 99,999

Item 1 24,666 1.7 41,932
Item 5 8,333 1.5 12,500
154,431

APIPA 2009
STEP 6: CALCULATE
RESULTS - EXAMPLE
Item Projected 95% Upper Upper
Misstatement Limit Increment Misstatement
Group 2 154,431
Group 1 7,200
Upper 161,631
Misstatement
Limit

APIPA 2009
STEP 7: DRAW
CONCLUSIONS
• If Upper Misstatement Limit > Tolerable
Misstatement, balance is materially
misstated.
• If Upper Misstatement Limit > Tolerable
Misstatement, balance is not materially
misstated

APIPA 2009
IN-CLASS EXERCISES NO.
5 TO NO. 6

APIPA 2009
IN-CLASS EXERCISE NO. 5

1. Sampling interval: Loan # Recorded

Amount
746,237 / 10 = 74,624
1 141,100
3 66,600
5 10,230
11 4,350
20 16,530
24 2,950
26 131,200
27 50,370
APIPA 2009 32 5,900
IN-CLASS EXERCISE NO. 5

1. Sampling items always included:

The loans > the sampling interval

Loan #1 – 141,100
Loan #26 – 131,200

APIPA 2009
IN-CLASS EXERCISENO. 6

Recorded amount of accounts receivable =

$400,000
•

• Tolerable misstatement: $20,000; 20,000 / 400,000 =

5%
• Risk of incorrect acceptance: 5%
• Expected misstatements: 0
• Sample size = 59
• Sampling interval = 400,000 / 59 = 6,780

APIPA 2009
IN-CLASS EXERCISENO. 6

Error Recorded Audit Difference Tainting

Amount Amount %
1 400 320 80 20%

2 500 0 500 100%

3 7,000 6,500 500 NA

APIPA 2009
IN-CLASS EXERCISENO. 6

Error Tainting % Sampling Projected Upper Upper

Interval Misstate- Limit Limit
ment Increment Misstate-
ment
Logical
unit BV
<
Samplin
g
Interval
2 100 6,780 6,780 1.7 11,526
1 20 6,780 1,356 1.5 2,034
APIPA 2009
IN-CLASS EXERCISENO. 6

Error Tainting % Sampling Projected Upper Upper

Interval Misstate- Limit Limit
ment Increment Misstate-
ment
Logical
unit BV
>
Samplin
g
Interval
3 NA NA 500 NA 500
Basic
Precisio
APIPA 2009
n: 3.0
IN-CLASS EXERCISENO. 6

Error Tainting % Sampling Projected Upper Upper

Interval Misstate- Limit Limit
ment Increment Misstate-
ment
Logical 13,560
unit BV
<
Samplin
g
Interval
Logical 500
unit BV
>
Samplin
APIPA 2009
g
NONSTATISTICAL SAMPLING
– BALANCE TESTING
• Differences in
•

• Identifying individually significant items

• Determining sample size
• Selecting sample items
• Calculating sample results

APIPA 2009
IDENTIFYING INDIVIDUALLY
SIGNIFICANT ITEMS
• Selected due to large size
• Tested 100%
• Results similar to PPS selection
• For example, selecting all items > $100,000

APIPA 2009
DETERMINING SAMPLE
SIZE
• Sample size =
Sampling Population BV * Assurance
(Tolerable – Expected Factor
Misstatement)

where Sampling Population BV excludes

individually significant items

APIPA 2009
DETERMINING SAMPLE
SIZE
Assessment Desired Level of Confidence – Assurance Factors
of RMM
Maximum Slightly below Moderate Low
maximum
Maximum
3.0 2.7 2.3 2.0
Slightly below
maximum 2.7 2.4 2.0 1.6
Moderate
2.3 2.1 1.6 1.2
Low
2.0 1.6 1.2 1.0

APIPA 2009
DETERMINING SAMPLE
SIZE - EXAMPLE
• Book value = $3,100,000
• Individually significant items = $1,500,000
•
Tolerable misstatement = $150,000
• Expected misstatement = $25,000
• Desired confidence level = Maximum
• Risk of MM = Maximum
• Sample size = 1,600,000 * 3.0
(150,000 – 25,000)
= 38.4, round to 39

APIPA 2009
SELECTING SAMPLE
ITEMS
• Random selection
• Systematic selection
• Haphazard selection

APIPA 2009
CALCULATING SAMPLE
RESULTS
• Sample misstatement MUST be projected to
population
• Two acceptable methods
•

• Apply sample misstatement ratio to population

(ratio estimation)
• Apply average misstatement $ of each item in
sample to all items in population (difference
estimation)
APIPA 2009
CLASSICAL SAMPLING

• Ratio estimation
• Difference estimation

APIPA 2009
RATIO ESTIMATION

• Sample misstatements = $19,000

• Sample book value = $175,000
• Sample error rate = 10.9%, round to 11%
• Total population BV = $1,840,000
• Projected misstatement = $1,840,000 * 11%
= $202,400
• Compare projected misstatement to tolerable
misstatement

APIPA 2009
DIFFERENCE ESTIMATION

• Sample misstatements = $19,000

• # of sample items with misstatements = 5
• Average misstatement per sample item = $3,800
• # items in population = 256
• Projected misstatement = $3,800 * 256 = $972,800
• Compare projected misstatement to tolerable
misstatement

APIPA 2009
IN-CLASS EXERCISE NO. 7

APIPA 2009
IN-CLASS EXERCISE NO. 7
Nonstatistical Sample Results:
•
Errors in accounts > $10,000 33,000
•
Errors in accounts < $10,000:
•
Total errors $ 4,350
•
Sample BV $81,500
• Error rate 5.34%
•
Applied to population:
• 2,760,000
•
(465,000)
• 2,295,000 * 5.34% 122,553
•
Total estimated error 155,553
• Tolerable misstatement 81,500
•
Conclusion: Account materially misstated

APIPA 2009
IN-CLASS EXERCISE NO. 7
- PPS
PPS Sample Results:
• Accounts receivable recorded
balance: $2,760,000
• Accounts > $10,000 (tested
separately) (465,000)
• Accounts receivable population
– PPS $2,295,000
• Tolerable misstatement $ 81,500

APIPA 2009
IN-CLASS EXERCISE NO. 7
- PPS
Sample and sampling interval:
Tolerable rate: 81,500 / 2,295,000 = 3.55%,
round to 4%
Expected rate: 0
5% risk of overreliance (since IR and CR are
both high)
Sample size: 74
Sampling interval: 2,295,000 / 74 = 31,014

APIPA 2009
IN-CLASS EXERCISE NO. 7
- PPS
Recorde Audited Difference Tainting
d Value %
Value
Item 12 5,120 4,820 300 5.85
Item 19 485 385 100 20.6
Item 33 1,250 250 1,000 80
Item 35 3,975 3,875 100 25.2
Item 51 1,850 1,825 25 1.4
Item 59 4,200 3,780 420 10
Item 74 2,405 0 2,405 100

APIPA 2009
IN-CLASS EXERCISE NO. 7
- PPS
# of Overstatement
Misstatements
5% Upper Limit Increment
0 3.00
1 4.75 1.75
2 6.30 1.55
3 7.76 1.46
4 9.16 1.40
5 10.52 1.36
6 11.85 1.33
7 13.15 1.30
APIPA 2009
IN-CLASS EXERCISE NO. 7
- PPS
Taint Sampling Projected Upper Upper
ing Interval Misstatem Limit Misstatement
% ent Factor
Ite 100 31,014 31,014 1.75 54,275
m
74
Ite 80 31,014 24,811 1.55 38,457
m
33
Ite 25.2 31,014 7,816 1.46 11,411
m
35
Ite 20.6 31,014 6,389 1.40 8,944
m
19
IteAPIPA 200910 31,014 3,101 1.36 4,218
m
IN-CLASS EXERCISE NO. 7
- PPS
• Items < Sampling Interval: 120,282
• Items > Sampling Interval: None
• Basic precision: 3.0 * 31,014 = 93,042
• Upper misstatement limit = 213,324
• Conclusion: Account is materially misstated.
Upper misstatement limit 213,324 > tolerable
misstatement 81,500

APIPA 2009
RESOURCES

rd
• Audit Sampling: An Introduction, 3 Edition,
Guy, Carmichael & Whittington
• Audit Guide: Audit Sampling, New Edition
as of May 1, 2008, AICPA
th
• Auditing & Assurance Services, 6 Edition,
Messier, Glover, & Prawitt
• Auditing & Assurance Services, 12th Edition,
Arens, Elder & Beasley

APIPA 2009
THE END!

APIPA 2009