COMMISSION ON AUDIT MEMORANDUM NO.

84-316-A January 31,1984

TO : All COA Managers, Regional Directors, Heads of Auditing Units, and

All Others Concerned.

SUBJECT : Revising the Statistical Sampling Scheme in the Audit of Transactions

by Auditing Units in National and Local Agencies and Government
Owned and/or Controlled Corporations.

I. Rationale for the Revision

A review and evaluation of the sampling scheme prescribed in COA

Memorandum No. 82-316 indicate a need to introduce the so-called Pareto's
"principle of distribution" so as to focus and give priority to the really significant
transactions which are subject to audit.

The previously prescribed sampling procedure did not consider the materiality
of the samples taken, thereby allowing the probability that these samples will mainly
consist of trivial transactions where errors or defects are of less significance. The
sampling scheme herein prescribed assures greater reliability of results in that it
considers the most significant
transactions, following the Pareto concept that only about 20% of the population
account for around 80% of its total output.

II. Statement of Policy

Statistical sampling is a generally-accepted audit technique which has been

proven to be an efficient and reliable tool in the conduct of audit. It also allows the
auditor to determine by inference the characteristics of financial transactions of an
agency, thereby enabling him to identify the more important aspects for further
analysis in his conduct of economy, efficiency, and effectiveness audits.

Accordingly, this Commission issued Resolution No. 82-49 dated October

11, 1982 declaring in effect, the following policies concerning statistical
sampling:

1. The Commission shall now utilize statistical sampling in the audit of

transactions involving national and local agencies as well as government owned
and/or controlled corporations, effective January, 1983.

2. Statistical sampling shall facilitate the complete institutionalization of

comprehensive audit.

3. As an audit tool, sampling shall not be substituted for good auditorial

judgment. As much, the auditor is not prevented from using other means or tools
in accomplishing his audit objectives.

4. In order to benefit from its use, sampling in audit shall be

constantly updated and modified according to the needs of the auditor and his audit
objectives. in consonance with the over-all policies and objectives of the
Commission.

5. The official adoption of statistical sampling does not prevent the

Commission from going into one-hundred percent voucher audit, if circumstances
so warrant.

III. Operational Definitions

As used in this Memorandum, the following terms shall be understood as

hereunder defined:

1. Audit domain - shall refer to the 20% biggest transactions (the

significant few) in a given population.

2. Audit suburbs - shall refer to trivial many, or the rest of the population
after the "audit domain' has been extracted.

3. Error rate - the number of defective vouchers per 100 transactions.

4. Batch - shall consist of all transactions submitted by the auditee-

agency accompanied by the prescribed transmittal form.

5. Starting number - applies to the number selected for each month

by the Ad Hoc Committee as basis for drawing the required sample.

6. Route - direction specified for each month by the Ad Hoc Committee

which is either vertical or horizontal, beginning from the starting number.

7. Ad Hoc Committee - the committee constituted by the Commission

to take charged of designating the monthly starting number in drawing the sample.

8. Reporting Month - the month when the transactions were received by

the auditing unit from the auditee-agency.

IV. Tolerable Error Rate

For purpose of expenditing the use of statistical sampling in audit, an

Acceptance Sampling Scheme using single sample plan shall be used.

A basic assumption in the use of sampling just like in a detailed audit, is

the discovery of certain transactions or vouchers with errors. For that matter, the
use of sampling necessitates some tolerance of error.

The Commission hereby designate a tolerable error rate of eight percent

(8%) for purposes of the sampling. The Unit Auditor shall invariably guarantee that
the number of defective vouchers are within the tolerable error rate, if such is the
case.
V. Strategy for Implementation

A. Release of Starting Number:

Following the prescribed procedures, the Ad Hoc Committee shall determine

the monthly starting number to be used by the Unit Auditors. These starting
numbers shall be released to the Regional Directors/Operating Managers quarterly
within 5 days before every quarter.

The Unit Auditor shall initially request in writing for authority to use the
sampling technique. The request shall be addressed to the Regional
Director/Operating Manager concerned, who in turn shall evaluate the same based
on the criteria set by the Commission. Once the Unit Auditor is granted the
authority, the Regional Director/Operating Manager releases the pre-
determined monthly starting number within five days before the beginning of every
month, without need of further request from auditors concerned.

B. Reporting Requirements:

The Regional Directors/Operating Managers shall monitor the application of

the sampling technique in the auditing units their respective jurisdictions, and submit
progress reports quarterly to the Chairman thru the Ad Hoc Committee.

VI. Procedure on the Use of Statistical Sampling Technique

The following are the procedures to be observed by the Unit Auditors in

applying the sampling technique:

A. Transmittal of Records

1. Vouchers, reports and other documents of the auditee-agency shall be

submitted to the auditing unit within the prescribed period in batches. It shall be
accompanied by a Transmittal Form (see Annex "A") listing down all the
transactions by checks or official receipt numbers.

2. The Transmittal Form shall contain columns for Item Number,

Check/Official Receipt Number, Voucher Number, and Amount. Furthermore, the
Item Number column shall show the total of transactions in a batch, which shall
represent the whole population size or universe.

B. Extracting the Audit Domain

3. The audit domain, the size of which shall be 20% of the total number
of transactions in a batch (population), shall be determined.

4. On the basis of the listing in the Transmittal Form, the transactions

representing the biggest amounts corresponding to the audit domain size shall be
subjected to 100 percent audit.

C. Obtaining the Sample from the Audit Suburb

5. The remaining 80% of the population size, which constitutes the

audit suburb, shall be subject to sampling.
 6. To determine the sample size, the Table of Sample Sizes as
appearing in Annex "B" shall be used.

7. In order to obtain the sample from the audit suburb, the Unit Auditor
must first receive the starting number from the Regional Director/Operating
Manager. Thereafter, he shall refer to the Table of Random Numbers in Annex "C"
and shall proceed as in the example given below:

a. Suppose the information on the starting number as received

from the Regional Director/Operating Manager is as follows:

Reporting Table Location Starting

Month No. Column Row No. Route

May 6-2 5 89 86863 Down

b. Refer now the Table of Random Numbers. Note that each

random number consists of five digits. If the suburb size is of three digits, use
only either the first three or the last three digits in the Table of Random
Numbers. Using the starting number supplied by the Regional Director/
Operating Manager, proceed by using the given route which is down the
column, and take note of all the numbers which will correspond to the
item number of the transactions. Discard those numbers which are greater
than the audit suburb size. Numbers appearing more than once must be
recorded only one time. Thus: if the total number of items in a batch is 400
and starting from 86863 as given in (a) above, we note the following
numbers (going down with the last three digits considered):

273, 117, 277, 152, 285, 201, 178

018, 361, 279,

046, 218, 238, 015, 111, 369, 019

220, 249, 326, 397

and continue picking out until the sample size is obtained.

The foregoing are now the samples corresponding to the item

numbers of the transactions which shall subject to audit.

8. All transactions thus selected as samples shall be picked out from

the batch of transactions, and shall be subjected to 100% audit.

D. Determining the Error Rate:

9. After auditing the samples, the percentage of error shall be

determined by dividing the number of `defective' transactions by the total number
of samples.
 10. If the percentage of error exceeds the tolerable error rate, the rest
of the transactions shall all be audited. Otherwise stated, the entire population
shall be audited.

11. If the computed percentage of error is within the tolerable error rate
the defective ones shall have been corrected, the whole batch may be passed in
audit. However, it should be emphasized that accountable officers who have
defective transactions in the audited samples, shall not be cleared of their
accountabilities until after those transactions shall have been corrected/adjusted.

VII. Repealing Clause

This memorandum repeals and supersedes COA Memorandum No. 82-316

dated October 5, 1982, entitled "Adoption of Statistical Sampling in the Post-Audit of
Transactions by Auditing Units in National and Local Agencies and Government
Owned and/or Controlled Corporations".

(SGD.) FRANCISCO S. TANTUICO, JR., Chairman

 Annex B

TABLE OF SAMPLE SIZES

Instruction: Columns (N) and (n) correspond to the population and sample size,
respectively. To determine the sample size, suppose the total number
of transactions representing the audit suburb is 150, locate under
column (N) the number 150. The opposite under column (n) shall be
the sample size.

(N) (n) (N) (n) (N) (N)

---- ---- ----- ----- ------- ------

50 44 370 188 975 275

60 52 380 191 1000 278
70 59 390 193 1050 281
80 66 400 196 1100 285
90 73 410 198 1150 288
00 79 420 201 1200 291
110 85 430 203 1250 294
120 91 440 205 1300 297
130 97 450 207 1350 299
140 103 460 209 1400 301
150 108 470 211 1450 304
160 113 480 213 1500 306
170 118 490 215 1550 308
180 123 500 217 1600 310
190 127 525 222 1650 312
200 132 550 226 1700 313
210 135 575 230 1750 315
220 140 600 234 1800 317
230 144 625 238 1850 318
240 148 650 241 1900 320
250 151 675 244 1950 321
260 155 700 248 2000 322
270 159 725 251 2100 325
280 165 775 256 2300 329
290 165 775 256 2300 329
300 168 800 260 2400 331
310 172 825 262 2500 333
320 175 850 265 2600 535
330 178 875 267 2700 336
340 180 900 269 2800 338
350 183 925 272 2900 339
360 186 950 274 3000 341
 NZ2 p(1 - p)
N =
Nd2 + Z2 p(1 - p)

NOTE: Table of sample sizes (n) required for populations (N)

of various sizes (50-3000) with a desired reliability of
1.95, a proportion of 0.50 and a maximum sampling.