AUDIT SAMPLING 4.

For tests of control, it has the following aspects:

(BASED ON PSA 530: AUDIT SAMPLING AND OTHER SELECTIVE TESTING PROCEDURES) a. Risk of assessing control risk too low (Risk of Overreliance)
 The risk that the auditor would conclude that the control risk is lower than it actually is
 It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion
Selecting items of testing to gather audit evidence b. Risk of assessing control risk too high (Risk of under reliance)
When designing audit procedures, the auditor should determine appropriate means of selecting items for testing. The means available to  The risk that the auditor would conclude that control risk is higher than actually is
the auditor are:  It affects audit efficiency as it would lead to additional work to establish that initial conclusions were
a. Selecting all items (100% examination) incorrect
b. Selecting specific items 5. For substantive tests, it has the following aspects:
c. Audit sampling a. Risk of incorrect acceptance
 The risk that the auditor would conclude that a material error exists when in fact it does
 It affects audit effectiveness and is more likely to lead to an inappropriate audit opinion
Selecting all items (100% examination) b. Risk of incorrect rejection
 Unlikely in the case of tests of control but more common for substantive procedures  The risk that the auditor would conclude that a material error exists when in fact it does not
 May be appropriate when:  It affects audit effectiveness as it would lead to additional work to establish that initial conclusions were
a. The population constitutes a small number of large value items incorrect
b. When both inherent risk and control risk are high and other means do not provide sufficient appropriate audit NONSAMPLING RISK
evidence It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of the sample. For
c. When the repetitive nature of a calculation or other process performed by a computer information system example, most audit evidence is persuasive rather than conclusive, the auditor might use inappropriate procedures, or the auditor might
makes a 100% examination cost effective misinterpret evidence and fail to recognize an error.

Selecting specific items 5 STEPS IN ATTRIBUTE SAMPLING PLAN

 The auditor may decide to select specific items from a population based on such factors as knowledge of the client’s business, 1. Define the objectives of the plan
preliminary assessments of inherent and control risks, and the characteristics of the population being tested 2. Define the population
 The judgmental selection of specific items is subject to nonsampling risk  For example, if an auditor’s objective is to test controls designed to assure that all shipped goods are invoiced,
 Specific selected items may include: the population would be defined as all sipping documents issued during the period not all sales invoices
 High value or key items
 All items over a certain amount 3. Define the attribute and deviation conditions
 Items to obtain information  An attribute s a characteristic of control. For example, the supervisor’s signature of approval on a document. A
 Items to test procedures deviation is the absence of an attribute
 While an efficient means of gathering audit evidence, it does not constitute audit sampling. The results of audit procedures applied 4. Determine the sample size
to specific items selected cannot be projected to the entire population The sample size is determined by considering the following factors:
a. Risk of assessing control risk too low
AUDIT SAMPLING b. Tolerable deviation rate
1. “Audit Sampling” involves the application of audit procedures to less than 100% of items with an account balance or class of c. Expected population deviation rate
transactions
2. Sampling may be statistical or nonstatistical. Risk of assessing control risk too low
I. Statistical sampling means any approach t sampling that has the following characteristics:  There is an inverse relationship between the risk and the sample size. The higher the acceptable risk, the smaller the sample
a. Random selection of a sample size
b. Use of probability theory to evaluate sample results  Because the risk of assessing control risk too low relates to the effectiveness of the audit, it is kept at a relatively low level by
the auditor
II. Nonstatistical sampling is a sampling approach that does not have characteristics (a) and (b).
Tolerable deviation rate
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In aids an auditor I forming conclusions  This the maximum deviation rate that the auditor is willing to accept
about one r more characteristics or either a particular class of transactions or a particular account balances  The lower the rate of deviation that the auditor is willing to accept, the larger the sample size needs to be

1. ATTRIBUTE SAMPLING Expected population deviation rate (expected error)

 Applicable to tests of control  The rate of deviation from the prescribed control procedure the auditor expects to find in the population
 Used to test an entity’s rate of deviation (also called rate of occurrence) from a prescribed control procedure  The higher the rate of deviation the auditor expects, the larger the sample size needs to e so as to be in a position o make a
2. VARIABLES SAMPLING reasonable estimate of the actual rate of deviation
 Applicable to substantive test  Factors relevant to the auditor’s consideration of the expected error rate include:
 Most commonly used to test whether recorded account balances are fairly stated o The auditor’s understanding of the business (in particular, procedures undertaken to obtain an understanding of the
accounting and internal control systems)
SAMPLING RISK o Charges in the personnel or in the accounting and internal control systems
1. It arises from the possibility that the auditor’s conclusion, based on a sample may be different from the conclusion reached if the o The results of audit procedures applied in prior periods
entire population were subjected to the same audit procedures o The results of other audit procedures
2. The confidence level (also called reliability level) is the mathematical complement of the applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level when developing the sampling design

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 5. Determine the method of sample selections 2. SEQUENTIAL SAMPLING (ALSO CALLED STOP-OR-GO SAMPLING)
Some commonly used methods are:  The sampling plan is performed in several steps
 Following each step, the auditor decides whether to stop or to go on to the next step
a. Random number sampling  Appropriate when the auditor expects zero or very few deviations
 Each item in the population has an equal chance and nonzero probability of selection 3. DISCOVERY SAMPLING
 It is usually accomplished by generating random numbers from a random number table or computer program and tracing  Appropriate when the expected deviation rate is near zero and when the auditor’s objective is to find at least one deviation
them to associated documents or items in the population in a sample if the actual population deviation rate exceeds or equals a predetermined critical rate (tolerable deviation rate)
 It is appropriate for both statistical and nonstatistical sampling
STEPS IN A VARIABLE SAMPLING PLAN
b. Systematic selection 1. Determine the objectives of the test
 The number of sampling units in the population is divided by the sample size to give a sample interval, for example 50, and The auditor’s objective is to test the reasonableness of a record account balance, called hypothesis testing.
having determined the starting point within the first 50, each 50th sampling unit is hereafter selected 2. Define the population and sampling unit
 Although the starting point may be determined haphazardly, the sample is more likely to be truly random if it is determined 3. Choose an audit sampling technique
by use of a computerized random number generator or random number tables a. Statistical vs. Nonstatistical
 When using systematic selection, the auditor would need to determine that sampling interval corresponds with a particular b. Classical variables sampling vs. Probability-proportional-to-size sampling
pattern in the population 4. Determine the sample size
The auditor considers the following:
c. Block selection or cluster sampling a. Variation within the population
 It involves selecting a block(s) of contiguous items from within the population  Sample size varies in the same direction as the variation in population amounts. As population variation increases, so does
 It cannot be ordinarily used in audit sampling because most populations are structured such that items in sequence can be the sample size
expected to have similar characteristics to each other, but different characteristics from items elsewhere in the population  An estimate of population variation is made by determining a population standard deviation
 Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely be an b. Acceptable risk of incorrect rejection
appropriate sample selection technique when the auditor intends to draw valid inferences about the entire population c. Acceptable risk of incorrect acceptance
based on sample d. Tolerable error – the maximum monetary error that may exist in an account balance without causing the financial
statements to be materially misstated
d. Haphazard selection
 The auditor selects a sample without following a structured technique 5. Determine the method of sample selection
 It is not appropriate when using statistical sampling 6. Perform the sampling plan
7. Evaluate the sample results
e. Stratification The following procedures are performed:
 This involves subdividing the population into subpopulations or strata, i.e., a group of sampling units which have similar a. Projecting the same error to the population
characteristics (often monetary value) b. Considering sampling risk
 The strata must be explicitly defined so that each sampling unit can belong to only one stratum c. Considering qualitative information
 This method enables the auditor to direct his efforts towards the items he considers would potentially contain the greater d. Reaching an overall conclusion
monetary error
CLASSICAL VARIABLES SAMPLING TECHNIQUES
6. Perform sampling plan A. Mean-per-unit estimation
7. Evaluate and document results A classical variables sampling technique that projects the sample average to the population by multiplying the sample
These include: average by the number of items in the population
a. Determining the sample deviation rate
Sample deviation rate = number of deviations observed B. Difference estimation
Sample size It is a classical variables sampling technique that uses the average difference between audited amounts and individual
b. Determining the maximum population deviation rate (achieved upper deviation limit) and the allowance for sampling risk recorded amounts to estimate the total audited amount of a population and an allowance for sampling risk.
(achieved precision)
 The maximum deviation rate is based on the sample size and the number of deviations discovered. There are standard C. Ratio estimation
tables that yield maximum population deviation rates at specified risks of assessing control risk too low A classical variables sampling technique that uses the ratio of audited amounts to recorded amount in the sample to
estimate the total amount of the population and an allowance for sampling risk
 Allowance for sampling risk = Maximum Deviation Rate – Sample Deviation Rate
c. Considering qualitative information
Conditions for using difference and ration estimation
The auditor considers each of the deviation’s nature, importance, and probable cause
1. Each population item must have a recorded book value
d. Reaching an overall conclusion
2. Total population book value must be known
In assessing control risk, the auditor considers all available quantitative and qualitative information
3. Expected differences between audited and recorded book values must not be too rare
COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES
Choosing between difference and ratio estimation
1. ATTRIBUTE ESTIMATION SAMPLING
 A statistical sampling plan for tests of controls
Ratio estimation is more appropriate when he differences are nearly proportional to book values.
 Appropriate when an auditor wishes to estimate a true but unknown population deviation rate
 Uses a fixed sampling plan, i.e., the auditor tests a single sample
Difference estimation is more appropriate when there is little or no relationship between the absolute amounts of the differences and the
book values.

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PROBABILITY-PROPROTIONAL-TO-SIZE SAMPLING (PPS)
 PPS uses a peso as the sampling unit
 PPS sampling gives each individual peso in the population an equal chance of selection
 PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the sample selection method dictates that the larger the
transaction or amount, the more likely that it will be selected.
 PPS is inappropriate for testing liabilities because understatement is the primary audit consideration

EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR TESTS OF CONTROL

(PSA 530, APPENDIX I)

Factor Effect on Sample size

An increase in the auditor’s intended reliance on accounting and
Internal control systems increase

An increase in the rate of deviation from the prescribed control

Procedure that the auditor is willing to accept
(Tolerable error) decrease

An increase in the rate of deviation from the prescribes control

Procedure that the auditor expects to find in the population
(Expected error) increase

An increase in the auditor’s required confidence level (or conversely

A decrease in the risk that the auditor will conclude that the auditor will
Conclude that the control risk is lower than the actual control risk in the
Population) increase

An increase in number of sampling units in the population negligible effect

EXAMPLES OF FACTORS INFLUENCING SAMPLE SIZE FOR SUBSTANTIVE PROCEDURES

(PSA 530, APPENDIX II)

Factor Effect on Sample size

An increase in the auditor’s assessment of inherent risk increase

An increase in the auditor’s assessment of control risk increase

An increase in the use of other substantive procedures

Directed at the same financial statement assertion decrease

An increase in the auditor’s required confidence level (or

Conversely, a decrease in the risk that the auditors will conclude that
A material error does not exist, when in fact it does exist) increase

An increase in the amount of error the auditor expects to find in

The population (tolerable error) decrease

An increase in the amount of error the auditor expects to find in the

Population (expected error) increase

Stratification of the population when appropriate decrease

The number of sampling units in the population negligible effect

Reference: CPAR Review Center of the Philippines, Manila

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