Chapter 9

Audit Sampling

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 What is Audit Sampling?

• Applying a procedure to less than 100% of

a population
• To estimate some characteristic of the
population
•

• Qualitative
• Quantitative
 Risk
9-3

• Sampling risk
•

• risk that the auditors’ conclusions based on a

sample may be different from the conclusion they
would reach if they examined every item in the
population
• Nonsampling risk
•

• risk pertaining to nonsampling errors

• Can be reduced to low levels through effective
planning and supervisions of audit engagements
 Nonstatistical sampling
9-4

• The auditor estimates sampling risk by using

professional judgment rather than statistical
techniques
• Provides no means of quantifying sampling
risk
• Sample may be larger than necessary or
auditors may unknowingly accept a higher
than acceptable degree of sampling risk
 9-5
Advantages of Statistical Sampling

• Allows auditors to measure and control

sampling risk which helps:
•

• Design efficient samples

• Measure sufficiency of evidence
• Objectively evaluate sample results
 9-6

Selection of Random Sample

• Random sample results in a statistically
unbiased sample that may not be a
representative sample
• Random sample techniques
•

• Random number tables

• Random number generators
• Systematic selection
 9-7

Random Number Table

Other Methods of Sample Selection
9-8

• Other methods
•

• Haphazard selection
•

• Select items on an arbitrary basis, but without any

conscious bias
• Block selection
•

• Block sample consists of all items in a selected time

period, numerical sequence or alphabetical sequence
• Stratification
•

• Technique of dividing population into relatively

An Illustration of Stratification
 9-10

Types of Statistical Sampling Plans

• Attributes sampling
• Discovery sampling
• Classical variables sampling
•

• Mean-per-unit estimation
• Ratio estimation
• Difference estimation
• Probability-proportional-to-size sampling
 Dual Purpose Test
9-11

• Tested used both as a test of control and

substantiating the dollar amount of an account
balance
•

• Ex. Test to evaluate the effectiveness of a control

over recording sales transactions and to estimate
the total overstatement or understatement of the
sales account
 Allowance for Sampling Risk
9-12

• Amount used to create a range, set by + or –

limits from the sample results, within which
the true value of the population characteristic
being measured is likely to lie
• Precision
• Wider the interval, more confident but less
precise conclusion
• Can be used to construct a dollar interval
 Sample Size
9-13

• Significant effect on allowance for sampling

risk and sampling risk
•

• Sample size increase -> sampling risk and

allowance for sampling risk decrease
• Sample size affected by characteristics of
population
•

• Generally as Population increases -> sample size

increase
 Requirements of Audit 9-14

Sampling Plans
• When planning the sample consider:
•

• The relationship of the sample to the relevant audit objective

• Materiality or the maximum tolerable misstatement or deviation
rate
• Allowable sampling risk
• Characteristics of the population
• Select sample items in such a manner that they can be expected
to be representative of the population
• Sample results should be projected to the population
• Items that cannot be audited should be treated as misstatements
or deviations in evaluating the sample results
• Nature and cause of misstatements or deviations should be
evaluated
 9-15

Sampling Risks--Tests of Controls

Actual Extent of Operating Effectiveness

of the Control Procedure is
Adequate Inadequate
The Test of Controls
Sample Indicates:

Extent of Operating
Effectiveness is
Adequate

Extent of Operating
Effectiveness
Inadequate

(Ris
C
 9-16
Audit Sampling Steps for Tests of
Controls
• Determine the objective of the test
• Define the attributes and deviation conditions
• Define the population to be sampled
• Specify:
•

• The risk of assessing control risk too low

• The tolerable deviation rate
• Estimate the population deviation rate
• Determine the sample size
• Select the sample
• Test the sample items
• Evaluate the sample results
• Document the sampling procedure
Attributes Sampling: Relationship Between the Planned
Assessed Level of Control Risk and the Tolerable
Deviation Rate
 Illustration of Attributes Sampling--
Determining Sample Size
• Risk of Assessing Control Risk Too Low—5
percent
• Tolerable Deviation Rate—9 percent
• Expected Population Deviation Rate—2
percent
Figure 9.4: Statistical Sample Sizes for Tests of Controls at 5
Percent Risk of Assessing Control Risk Too Low
 Sample Size

Sample size using Figure 9-4 (next slide)

=68 (2)

• This means the auditor should select a sample

of 68 items. We will discuss the (2) in a few
slides.
 Attributes Sampling Evaluation of
Results
2 possible approaches:
1. Use the bracketed number from Table 9.4. If
you find that number or less deviations,
conclude that you have accomplished your
audit objective.
2. Use Table 9.5 for a more precise conclusion.
Example A--No Deviations Identified (Evaluating
Attributes Sampling Results)
Approach 1—You have met your audit objective (because the bracketed number was (2),
you meet objective when you identify 0, 1 or 2 deviations). What can you say?

“I believe that the deviation rate in the population is less than 9 percent.” You will be
wrong 5 percent of the time when the deviation is exactly 9 percent. If the deviation rate is
in excess of 9 percent you will be wrong even less than 5 percent of the time. The planned
assessed level of control risk is achieved.

Approach 2
You have tested 68 items, a number not on Table 9-5 (next slide
To be conservative go to next lowest number on table (65) and use it for your
conclusions (we could, but won't interpolate for a more precise answer).

You have met your audit objective. Table 9-5 gives us an answer of 4.6 percent.
What can you say?

"I believe that the deviation rate in the population is less than 4.6 percent.” You will
be wrong 5 percent of the time when the deviation rate is exactly 4.6 percent. If the
deviation rate is in excess of 4.6 percent you will be wrong even less than 5 percent of the
time. The planned assessed level of control risk is achieved.
Figure 9.5 Statistical Sampling Results Evaluation Table for Tests
of Controls: Achieved Upper Deviation Rate at5 Percent Risk of
Assessing Control Risk Too Low
Example B--3 Deviations Identified (Evaluating
Attributes Sampling Results
Approach 1—You have not met your audit objective. What can you say?
“The achieved upper deviation rate is higher than 9 percent.” The planned assessed
level of control risk is not achieved. You need to consider increasing the assessed level of
control risk above the planned assessed level.

Accordingly, you may not “rely” on internal control to the extent planned. Thus, the
auditor will need to increase the scope of substantive procedures (the nature, timing, and/or
extent).

Approach 2—You have not met your audit objective. Table 9-5 provides us an answer of
11.5 percent

“I believe that the deviation rate in the population is less than 11.5 percent.” You will
be wrong 5 percent of the time when the deviation rate is exactly 11.5 percent. But this is
not good enough as you wanted 9 percent rather than 11.5 percent. The planned assessed
level of control risk is not achieved. You need to consider increasing the assessed level of
control risk above the planned assessed level.

As per Approach 1, an increase in the scope of substantive procedures is appropriate.

 Other Statistical Attributes
9-25

Sampling Approaches
• Discovery sampling
•

• Purpose is to detect at least one deviation, with a

predetermined risk of assessing control risk too
low if the deviation rate in population is greater
than specified tolerable deviation rate
• Useful in suspected fraud
• Sequential (Stop-or-Go) Sampling
•

• Audit sample taken in several stages

 Sampling Risks--Substantive Tests 9-26

The Population Actually is

Not Materially Materially
Misstated Misstated
The Substantive
Procedure Sample
Indicates

Misstatement in
Account Exceeds
Tolerable Amount
C
Misstatement in D
Account Is Less
Than Tolerable
Amount
In
D
(Risk
Ac
Audit Sampling Steps for Substantive 9-27

Tests

• Determine the objective of the test

• Define the population and sampling unit
• Choose an audit sampling technique
• Determine the sample size
• Select the sample
• Test the sample items
• Evaluate the sample results
• Document the sampling procedure
 Population Variability—Why it Matters 9-28

Item Population APopulation B

1 2,100 8,000
2 2,100 25
3 2,100 2,000
4 2,100 400
5 2,100 75
Mean 2,100 2,100
Standard
deviation -0- 3,395
• The variability determines how much information each of the
items in the population tells you about the other items in the
population.
 9-29

Factors Affecting Sample Size

Mean Per Unit (MPU) Illustration

Population Size = 100,000 accounts

Book value = $6,250,000
Other information:
Tolerable misstatement = $364,000
Sampling risk
Incorrect Acceptance = 5%
Incorrect Rejection = 4.6 %
MPU Risk Coefficients
Acceptable Incorrect Incorrect
Level of Risk Acceptance Rejection
(%) Coefficient Coefficient

1.0 2.33 2.58

4.6 1.68 2.00

5.0 1.64 1.96

10.0 1.28 1.64

15.0 1.04 1.44

20.0 .84 1.28

25.0 .67 1.15

30.0 .52 1.04

40.0 .25 .84

50.0 .00 .67

Determining Sample Size--MPU(1 of
2)
⎛ Tolerable misstatement ⎞
Planned ASR = ⎜ ⎟
⎝ 1 + (Incorrect acceptance coefficien t / Incorrect rejection coefficien t) ⎠

⎛ $364,000 ⎞
Planned ASR = ⎜ ⎟ = $200,000
⎝ 1 + (1.64 / 2.00) ⎠
 Determining Sample Size--MPU (2 of
2)
2
⎛ Population size * Incorrect rejection coefficient * Est. std. dev. ⎞
Sample Size = ⎜⎜ ⎟⎟
⎝ Planned allowance for sampling risk ⎠

2
⎛ 100,000 * 2.00 * $15 ⎞
Sample Size = ⎜ ⎟
⎝ $200,000 ⎠

= 225 Accounts
 9-34

Variables Sampling Illustration--MPU

Adjusted allowance
for sampling risk =

Tolerable _ (Population size * Incorrect acceptance coef. * Sample stan. dev.)

misstatement Sample size

• This formula “adjusts” the allowance for sampling risk to consider the standard deviation of
the audited values in the sample. It holds the risk of incorrect acceptance at its planned
level.
 9-35

Variables Sampling
Using the text example with a standardIllustration--MPU
deviation of audited values of $16
Adjusted allowance
for sampling risk =
Tolerable _ (Population size * Incorrect acceptance coef. * Sample stan. dev.)
misstatement Sample size

= $364,000 _ ($100,000 * 1.64 * $16)

225
= $189,067

 We would still “accept” the book balance because the $6,250,000 (book value)
falls within this interval

Estimate of total + Adjusted allowance

audited value for sampling risk
 9-36

Acceptance IntervalFigure 9-12

 Difference Estimation
• Difference
•

• Use sample to estimate the avg. difference

between the audited value and book value of items
in population
•

Projected = Sample Net Misstatement * Pop. Items

Misstatement Sample items
•

• Most appropriate when size of misstatements does

not vary significantly in comparison to book value
 Ratio Estimation
9-38

• Use a sample to estimate the ratio of

misstatement in a sample to its book value
and project it to population
Projected = Sample Net Misstatement * Pop. Book Value
Misstatement Book Value of Sample

• Preferred when the size of misstatements is nearly

proportional to the book values of the items
• Large accounts have large misstatements
 Nonstatistical Variables Sampling 9-39

Illustration
• Plan Sample:
•

• Population:
•

• Size = 363 items

• Book value = $200,000
•

• Tolerable misstatement = $10,000

• Risk assessments:
•

• Inherent and control risk = Slightly below maximum

• Other substantive tests = Moderate
Nonstatistical Sampling--Determination 9-40

of Sample Size

Sample size = Population book value X Reliability factor

Tolerable misstatement
= $200,000 X 2.0 = 40 items
$10,000
 Nonstatistical Sampling--Evaluation of 9-41

Sample Results

• Sample results:
40 accounts in sample
$350 net overstatement
$60,000 book value of sample items

• Projected misstatement:

= [Sample net misstatement] X Book value of population

[ Book value of sample ]
= [ $350 ] X $200,000
[$60,000]
= $1,167

Since the projected misstatement is only 11.7 percent ($1,167/$10,000) of

tolerable misstatement, it is likely that the auditors would conclude that the
account balance is materially correct.
 PPS Sampling Illustration 9-42

• Population book value = $6,250,000

• Other Information:
•

• Tolerable misstatement = $364,000

• Sampling risk--Incorrect acceptance = 5%
• Expected misstatement = $50,000
• Use Figures 9-14 and 9-15 to obtain a
“reliability factor” and an “expansion
factor”--next slide
PPS Sampling Reliability and
Expansion Factors
 9-44

PPS Sample Size Computation

• Sample size =

Recorded amount of population * Reliability factor

Tolerable misstatement - (Expected misstatement * Expansion factor)

= $6,250,000 * 3.0 = 66
$364,000 - ($50,000 * 1.6)

Sampling interval = Book value of the population

Sample size
= $6,250,000 = $95,000 (approximately)
66
Figure 9.16 PPS Sample Selection
Process
 9-46

PPS Evaluation of Results

Upper Limit on misstatement =

Projected misstatement
+ Basic precision (Rel. factor x interval)
+ Incremental allowance
 9-47
Calculation of Upper Limit on Misstatement
 Comparison of statistical sampling
techniques for substantive procedures
 Audit Risk
9-49

AR = IR x CR x DR
where
• AR=The allowable audit risk that a material misstatement might remain
undetected for the account balance and related assertions.
• IR= Inherent risk, the risk of a material misstatement in an assertion,
assuming there were no related controls.
• CR= Control risk, the risk that a material misstatement that could occur in
an assertion will not be prevented or detected on a timely basis by internal
control.
• DR= Detection risk, the risk that the auditors’ procedures will fail to detect
a material misstatement if it exists.