Chapter 9

Audit Sampling
 9-2

What is Audit Sampling?

 Applying a procedure to less than

100% of a population
 To estimate some characteristic of the
population
 Qualitative
 Quantitative

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-3

Advantages of Statistical Sampling

 Design efficient samples

 Measure sufficiency of evidence
 Objectively evaluate sample results

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-4

Selection of Random Sample

 Random number tables

 Random number generators
 Systematic selection

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-5

Random Number Table

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-6

Types of Statistical Sampling Plans

 Attributes sampling
 Discovery sampling
 Classical variables sampling
 Probability-proportional-to-size sampling

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-7

Requirements of Audit
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

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-8

Sampling Risks--Tests of Controls

True State of Population

Deviation Rate Deviation Rate
Exceeds Is Less Than
Auditors’ Conclusion Tolerable Rate Tolerable Rate
From the Sample Is:
Incorrect
Deviation Rate Correct Decision
Exceeds (Risk of Assessing
Tolerable Rate
Decision
Control Risk
Too High)
Incorrect
Deviation Rate
Is Less Than Decision Correct
Tolerable Rate (Risk of Assessing
Decision
Control Risk
Too Low)

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-9

Audit Sampling for Tests of Controls

 Determine the objective of the test

 Define the attributes and deviation conditions
 Define the population to be sampled
 Choose an audit sampling technique
 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

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-10

Sampling Risks--Substantive Tests

True State of Population

Misstatement in Misstatement in
Account Exceeds Account Is Less
Auditors’ Conclusion Tolerable Amount Than Tolerable
From the Sample Is: Amount

Incorrect
Misstatement in Correct Decision
Account Exceeds
Tolerable Amount Decision (Risk of Incorrect
Rejection)

Misstatement in Incorrect
Account Is Less Decision Correct
Than Tolerable (Risk of Incorrect Decision
Amount Acceptance)

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-11

Audit Sampling for Substantive

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

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-12

Population Variability—Why it Matters

Item Population A Population 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.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-13

Factors Affecting Sample Size

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-14

Determining Sample Size--MPU

Sample size =
 Pop. size x Incorrect rej . coef . x Est. SD 
 
 Planned allowance for sampling risk 

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-15

Determining Sample Size--MPU

Sampling

Planned allowance Tolerable misstatement

______________________
for sampling risk =
1 + Incorrect acceptance coef.
Incorrect rejection coef.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-16

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.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-17

Variables Sampling Illustration--MPU

Using the text example with a standard 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
$6,100,000 + $189,067
[$5,910,933 to $6,289,067]

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-18

Acceptance Interval

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-19

Nonstatistical Variables Sampling

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

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-20

Nonstatistical Sampling--
Determination of Sample Size

Sample size = Population book value X Reliability factor

Tolerable misstatement

= $200,000 X 2.0 = 40 items

$10,000

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-21

Nonstatistical Sampling--Evaluation
of 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.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-22

PPS Sampling Illustration

 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.”

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-23

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

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-24

PPS Evaluation of Results

Upper Limit on misstatement =

Projected misstatement
+ Basic precision (Rel. factor x interval)
+ Incremental allowance

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

 9-25

Calculation of Upper Limit on Misstatement

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.